Going Subnational with Strategy
Subnational strategy is a key element of modern management practices. This used to be the domain of operations and tactics (e.g., sales force optimization) but is now increasingly used in strategic planning.
“More and more, international strategy is being considered at the subnational level…In November 2013 Tesla opened its first wholly-owned showroom in Beijing. In light of China’s 2017 country-level GDP per capita at PPP of just $16,700, Tesla’s decision to enter the Chinese market seems foolhardy. That is, if you look at the national level. The story is different from a subnational perspective.” Hutzschenreuter et al., 2020
Why Are Subnational Strategies Important?
For global companies, around ⅓ of profitability depends on how well they adapt to subnational differences in the countries they serve.
Subnational differences in income and culture make a dramatic difference in category, brand, and SKU demand. They also influence marketing, pricing, and distribution coverage. Moreover, the cost to serve consumers — supply chain activities — are a function of subnational variances.
Without a strategic subnational perspective, resource allocation will be suboptimal, leading to inefficiencies throughtout the company.
How Do Subnational Entities Differ From National Averages?
There are two types of subnational entities:
- Subdivisions: states, provinces, departments within countries
- Cities: metro areas defined by commute, media markets, etc.; not by administrative boundaries. (E.g., Boston metro area has 5 million people; Boston administratively has 600,000 people.)
The map below shows disposable income for 2,400 subdivisions. Data is from our TelluBase product (which also also contains 2,600 cities).
While we do not show the cities, the differences between them and the surrounding areas is even more dramatic. In emerging countries, a city can easily have 2–3 times the income of the surrounding area. In affluent countries, it is usually between 120% to 180% of the surrounding area.
Beyond current levels of income, how do subnational entities grow compared to their countries?
The graph below shows the growth rates of the middle class of the ten largest Latin American cities. It is compared to the national GDP per capita growth that many companies (incorrectly) use. Remember the quote at the beginning regarding Tesla.
Notice how all cities outperform the national average, often by a wide margin. These differences are even more striking in Asia and Africa, while Latin America is somewhat similar to Northern America and Western Europe.
What Are Some Case Examples?
Tellusant’s principals have worked on countless subnational strategies. The graph below gives an example of what can be done with subnational data when quantifying local market opportunities.
First, the top graph shows the relationship between internet penetration and size of the middle class in South Africa by province, in turn divided into metro, urban, and rural areas. We matched internet data from ICASA with our TelluBase socioeconomic data, and then plotted them against each other. The excellent fit (R² = 0.80) did not surprise us.
Second, look at what we call “The Envelope”. This is outer bound of what could be achieved, For example, while Johannesburg already has high internet access, it could, given the size of the middle class, be even higher. The difference between “The Envelope” and the actual is a potential to be developed.
Third, the lower graph converts this to total market opportunity in number of households. Five geographic entities make up 80% of the potential. We now have a strategic sense for what to prioritize.
The same logic holds for any consumer-facing category as well as for many non-consumer products. We used the envelope method to quantify which countries should cut carbon emissions the most (North Korea topped the list in percentage terms).
Without as much detail, a few other case examples:
• An FMCG company thought that it should expand distribution in a few provinces that looked under-covered. The analysis showed that it was better to develop more outlets in the capital and the largest cities.
• During an M&A due diligence effort, one bidder had the same growth rate in all the market geographies. Unbeknownst to them, this led to massively unrealistic demand projections in the targets strongest markets.
Another bidder which we supported differentiated projections taken into local market saturation. This resulted in a much lower valuation.
The first bidder won the auction and destroyed massive shareholder value in the process, realized when they exited a few years later. There is nothing worse than winning and being wrong.
- A company had uniform pricing within a country. However, income differences were massive between cities and between departments. This left the market under-served. The solution was to set strategic price goals per geography. And rather than cutting prices, changing the brands and pack mix to fit each geography.
Tellusant’s principal’s have worked on subnational strategies as consultants over the past 20 years. We have covered all continents and worked on the ground in 82 countries.
Types of work include:
- Corporate and business strategy
- M&A strategic due diligence with demand modeling
- Market entry strategy
- “Sources of Growth” strategy
- Marketing plan optimization
- Strategic horizon forecasts (3–10 years out)
- Affordability and latent demand
Our strategy work is underpinned by our TelluBase socioeconomic database. It feeds into PoluSim, our forecasting and market simulation tool, and PACE (Pricing Aligned with Consumer Economics), our latent demand finding tool. All three are available as cloud-based subscriptions.
We are more than happy to discuss subnational issues and opportunities further. Please contact us at thought@tellusant.com.
